There has been increasing sharemarket volatility in recent weeks following the inconclusive election results in Greece.

What will happen next?
We believe that policymakers in Europe will be keenly aware of the lessons learnt from the financial crisis of 2008. Because of this, we do not necessarily believe that a disorderly Greek exit is a foregone conclusion.

Elections in Europe demonstrate that budget cuts or austerity will only ever be plausible so long as they have the support of the public. Voters in France, Italy and Greece have all unequivocally rejected the austerity at all costs approach so far in managing the crisis.

The French election has shifted the pendulum towards the possibility of a more lasting solution to the crisis - one that balances long-term structural reform, pro-growth policies and balanced budgets.

Greek exit not a foregone conclusion
While the last election in Greece saw voters resoundingly reject austerity, they equally rejected an exit from the Euro. A disorderly exit may be prevented by political will and the need to contain adverse outcomes for Europe and the rest of the world.

And, make no mistake, policymakers in the US and Asia will be tapping the shoulders of their European counterparts for an immediate and lasting solution. This may see Europe agreeing to fund Greece or a preplanned, orderly exit from the Euro.

What is the impact of the European crisis to the rest of the world?
The relative importance of Europe to Australia is small and declining – less than 10% of our exports go to the region. Asia is much more important and this dominance will only grow on record amounts of investment in the energy and resource sector.

The impact on China is also expected to be manageable. While Europe is China’s biggest customer for its exports, the recent slowdown in China has been driven primarily by higher interest rates to curb uncomfortably high inflation.

The US recovery is also continuing, and for Europe, Greece represents less than 3% of the European economy, implying that the crisis can be managed.

Given the potential escalation to Italy and Spain there is a common interest amongst all to put brinksmanship aside and implement a workable and lasting solution.

Interest rates and the AUD - twin support measures for Australia
If the European situation were to deteriorate Australian policymakers can rely on lower interest rates and a depreciating currency.

The RBA recently cut rates by 50 basis points, which is expected to support the non-resource economy, including retail sales and housing.

The Australian dollar will also track European concerns but the pace of depreciation has so far been much less than during the financial crisis in 2008.

The Federal Government also has scope to provide stimulus to the economy should there be a need to do so.

Things to consider
In periods of uncertainty many turn to cash or other strategies perceived to be safe. It is during these periods that investors all too often make decisions that are contrary to their long-term objectives.

While equity markets may well fall if Greece were to exit the Euro, it is important to also recognise that the global economy is still growing and global companies are making profits, paying back their debt and providing dividends to investors.

At the same time, the return on cash investments will decline on interest rate cuts. Bond markets look fully valued with yields near, or at, record lows for many developed economies.

During uncertain times long-term opportunities are most likely to emerge while equity markets remain below long-term valuations and policymakers may surprise markets, which could lead to a sharp turnaround in the price of equities.

Remember that frequent and undisciplined changes to your portfolio may lead to poor results. History has shown that missing just a few of the best months in equity markets may substantially reduce your overall return.

Note: Advice contained in this article is general in nature and does not consider your personal situation or needs. Please do not act on this advice until its appropriateness has been determined by a qualified adviser. While the taxation implications of this strategy have been considered, we are not, nor do we purport to be registered tax agents. We strongly recommend you seek detailed tax advice from an appropriately qualified tax agent before proceeding. The information provided is current as at May 2012.

The carbon tax has now become law with effect from 1st July 2012. Here we take a look at the changes to the personal tax system that will be made and how that will impact you.

Executive Summary

1. According to Government estimates, households will see cost increases of $9-90 per week which includes increasing electricity and gas charges.

2. There are two ways that households will receive compensation for the additional costs which include increases in pensions, allowances and family payments in addition to tax cuts.

Specifically these measures are:

- Pensioners and self funded retirees will get up to $338 extra per year if they are single and up to $510 per yer for couples combined. There will be a cash payment made to these people automatically in May/June 2012 which represents a "bring forward" payment.

- Families receiving Family Tax Benefit Part A will get up to an extra $110 per child.

- Eligible Families will get up to extra $69 in Family Tax Benefit B.

- Allowance recipients (eg New Start Allowance) will get up to $218 extra per year for singles, $234 per year for single parents and $390 per year for couples combined.

- On top of this, taxpayers with annual income of under $80,000 will all get a tax cut, with most receving at least $300 per year.

Tax Rate Changes In Detail

The new tax thresholds from 1st July 2012 will be as follows:

Taxable income

Tax on this income

0 - $18,200

Nil

$18,201 - $37,000

19c for each $1 over $18,200

$37,001 - $80,000

$3,572 plus 32.5c for each $1 over $37,000

$80,001 - $180,000

$17,547 plus 37c for each $1 over $80,000

$180,001 and over

$54,547 plus 45c for each $1 over $180,000

The tax free threshold will rise from $6,000 to $18,200, and the maximum value of the Low-income tax offset (LITO) will be reduced from $1,500 to $445. This means that the effective tax free threshold for ordinary Australians considering the LITO is now $20,542.

The first marginal tax rate will be increased from 15 per cent to 19 per cent, and will apply to that part of taxable income that exceeds $18,200 but does not exceed $37,000.

The second marginal tax rate will be increased from 30 per cent to 32.5 per cent, and will apply to that part of taxable income that exceeds $37,000 but does not exceed $80,000.

All of this results in tax cuts for working Australians earning up to $80,000 per year of around $300.

For retirees over the age of 65, who are entitled to the Seniors or Pensioner Tax Offset, the effective tax free threshold now rises to approx $32,200pa for singles and approx$29,000pa for each member of a couple living together ($58,000pa combined)

Food for thought: Australia's initial carbon tax is set at $23 per tonne. China is considering a carbon tax of $1-50 per tonne and according to a recent Financial Review article European businesses currently pay between $8-70 - $12-60 per tonne.

Note: Advice contained in this articler is general in nature and does not consider your personal situation or needs. Please do not act on this advice until its appropriateness has been determined by a qualified adviser. While the taxation implications of this strategy have been considered, we are not, nor do we purport to be registered tax agents. We strongly recommend you seek detailed tax advice from an appropriately qualified tax agent before proceeding. The information provided is current as at March 2012.

The legislation to apply an income test to the 30% private health insurance rebate has passed the House of Representatives and is expected to pass the Senate. The income test will start from July 1, 2012.

Obviously not everyone will be affected, but for those that are, they need to understand that their taxable income, any fringe benefits and superannuation come into the calculation of the income test. I will explain this below.

The legislation gives effect to 2009 Federal Budget announcements concerning the private health insurance rebate and consequential Medicare Levy Surcharge changes. The essence of the proposed changes is to effectively income test the 30% private health insurance rebate for individuals whose income for Medicare levy surcharge purposes is more than $83,000pa and for families where that income is more than $166,000pa.

To achieve the means testing, the legislation proposes to introduce three new "Private health incentive tiers" with effect from July 1, 2012. If the legislation is passed, then from that date, individuals and families may not be eligible for the full 30% rebate for their private health insurance premiums. In conjunction with this, also from July 1, 2012, the rate of Medicare levy surcharge for individuals and families without private patient hospital cover may increase depending on their level of income.

The effect of these new tiers would be that the rebate would begin to phase out for individuals who earn more than $83,000pa and for families where that income is more than $166,000pa. There would be no rebate where individual income is over $129,000pa and families over $258,000pa.

For single people aged 65 to 69 years, the rebate is 35% if they earn less than $83,000pa, and for those aged 70 and over earning that income, the rebate is 40%.

For families with more than one dependent child, the relevant threshold is increased by $1,500 for each child after the first.

In future years, the singles thresholds will be indexed to average weekly ordinary time earnings and increased in $1,000 increments (rounding down). The couples/family thresholds will be double the relevant singles thresholds.

For those who think they may be affected by the changes, the income test includes the sum of a person's:

taxable income (including the net amount on which family trust distribution tax has been paid, lump sums in arrears payments that form part of taxable income, and payments for unused annual and long service leave); plus

where the person is aged 55-59 years old, any taxed element of a lump sum superannuation benefit, other than a death benefit, which they received that does not exceed their low rate cap.

The rebate can currently be claimed in one of three ways:

The health fund can provide the rebate as a premium reduction.

Where the full, upfront cost of the private health cover premiums has been paid, people can receive a cash payment from the Government through their local Medicare office or by lodging the claim form by post.

The rebate can be claimed on annual income tax returns if the full, upfront cost has been paid.

The changes are significant in a "hip pocket" sense and because of the way in which the income test is calculated, people may need to consult their adviser to see how they may be impacted.

Note: Advice contained in this articler is general in nature and does not consider your personal situation or needs. Please do not act on this advice until its appropriateness has been determined by a qualified adviser. While the taxation implications of this strategy have been considered, we are not, nor do we purport to be registered tax agents. We strongly recommend you seek detailed tax advice from an appropriately qualified tax agent before proceeding. The information provided is current as at March 2012.

The old saying of buy in gloom and sell in boom is much easier in theory than in practice, firstly because of the emotional aspect of investing and secondly the difficulty investors have in measuring the gloom.

One reliable measure of measure of gloom (and boom) is the equity risk premium.

The definition of equity risk premium is "The excess return that an individual stock or the overall stock market provides over a risk-free rate. This excess return compensates investors for taking on the relatively higher risk of the equity market. The size of the premium will vary as the risk in a particular stock, or in the stock market as a whole, changes; high-risk investments are compensated with a higher premium."

Below is an updated chart of equity market risk premiums for the Australian share market. This chart highlights that equity market risk premiums are at levels not seen since the depth of despair from the GFC in March 2009 and in fact higher than they were during 1974 and 1980. The way of interpreting this chart is the higher the risk premium, shares are cheaper, and the lower the risk premium, the more expensive they are.

You will also see that historically, following peaks in the equity risk premium there have been significant share market rallies such as that experienced during 2009 which saw the market rise by around 25%.

Much of the cause for pessimism relates to Europe and we remain of the view that a workable medium term plan for Europe can be found. If this risk was reduced, one would expect equity risk premiums to drop which would result in an increase in share prices. Arguably most if not all tail risk if already priced into the sharemarket.

Clearly we are not in boom times, which is why we have a bias to buy (selectively) not sell at this point.

Note: Advice contained in this articler is general in nature and does not consider your personal situation or needs. Please do not act on this advice until its appropriateness has been determined by a qualified adviser. While the taxation implications of this strategy have been considered, we are not, nor do we purport to be registered tax agents. We strongly recommend you seek detailed tax advice from an appropriately qualified tax agent before proceeding. The information provided is current as at March 2012.

All too often we hear the generalist who says "buy healthcare because of the ageing of the population" or "can't lose in bricks and mortar".

When investing it is critical to scratch below the surface and avoid being tempted by the generalist.

Europe is currently an excellent study for this as the generalist would probably be saying that Europe is a basket case and investors should avoid it at all costs. Upon digging below the surface however it can be seen firstly that not all of Europe is a basket case. This is represented by the graph below whcih shows the GDP (commonly used to measure strength in an economy) of various European countries over the past 5 years.

While it is clear that the Greek economy is in poor health, the German economy is enjoying the cheap Euro that assists their exporters such as BMW. While talking of BMW, we read from the Wall Street Journal that the waiting list in China to buy a BMW is 6 months and that BMW is making considerable money exporting cars to China. Fund managers including Platinum Asset Management have made a significant amount of money from investing in BMW while the generalist would have missed the opportunity.

We encourage investors to "scratch below the surface when considering investments".

Note: Advice contained in this article is general in nature and does not consider your personal situation or needs. Please do not act on this advice until its appropriateness has been determined by a qualified adviser. The information provided is current as at March 2012.

An iPad is basically a portable computer that is capable of sending emails, accessing the internet and running a range of applications such as Street Directories, Woolworths, Kobo electronic book reader and thousands more.

The beauty of an iPad is that it weighs only 600 grams and operates through touching the screen, which means that you don’t have to be a computer programmer to operate one.

There are essentially two types of iPad, the first is 3G and the other is Wifi. The 3G version simply means that the iPad is capable of connecting to the internet by itself, and the user would simply purchase a 3G data plan from a provider such as Telstra. The Wifi version means that the user can connect to the internet using a Wireless Internet Network either in their house, or many companies provide free wireless networks such as McDonalds.

iPad 2 has been around for approximately 12 months now and is superseded by the latest iPad which is simply called “ïPad”. The main differences are that the latest iPad has a higher definition screen, front and back camera’s that are of better quality than the iPad 2 together with a faster internal processor.

iPad 2’s are still on the market and have been discounted in price. For more information about the iPad refer to the following link. http://www.computerdepot.com.au (ask for Mark Cunningham - he is very knowledgable and helpful)

What could you use it for?

Those who travel and want a light weight device to allow them to send and receive email and access the internet.

Those who travel can use the iPad as a Street Directory/GPS device

iPad 2 comes with a camera which allows you to video conference with family members or business associates using “Face Time”.

iPad can store and edit photographs and be used to display them as a picture frame

Starting with the bursting of the technology bubble in 2000, the fortunes of the US economy have waned. Since then, the US has seen two recessions with the last being the worst since the 1930s, a rising trend in unemployment, the bursting of a corporate debt bubble with the tech wreck and the bursting of a housing debt bubble with the sub-prime mortgage crisis. So it’s little wonder the US share market has been spinning its wheels in a secular bear market. Some commentators even talk of a permanent decline for the US.

The high level of US public debt, ongoing private sector deleveraging, less business friendly policies, demographic trends and the absence of extreme share market undervaluation suggest the secular bear market in US shares may not be over yet. That said, it would be dangerous to write the US off. Many did this in the 1970s only to see it roar back with vengeance in the 1980's and 90's .

More importantly, there are some signs of light at the end of the tunnel for the US in manufacturing, oil production and housing. This note takes a look at these sectors, focusing on the latter as housing was the original driver of the global ﬁnancial crisis.

US manufacturing renaissance

Recently there have been numerous examples of companies setting up manufacturing plants or expanding production in the US over locations in Canada, Mexico, Japan or the emerging world. These include Maserati, Toyota, Honda, Nissan, Kia, Intel, Whirlpool and Caterpillar. In fact for the ﬁrst time in over 35years, annual growth in manufacturing employment is exceeding employment growth elsewhere in the US economy. The key drivers of America’s manufacturing renaissance are restrained unit labour costs in manufacturing (which have been unchanged for the past 30 years), rising wages in emerging countries, the low US dollar (US$) after a decade long slump, and cheap energy prices helped by surging natural gas supply. While it’s early days yet, America’s manufacturing renaissance has further to go.

Surging oil production

US natural gas supply has been surging for years resulting in low prices. More signiﬁcantly, a few years ago US oil production quietly bottomed and is now on the rise again thanks to a surge in shale oil production. The US has huge reserves of shale oil and advances in fracking technology (by which shale kilometres below the surface is fractured using explosives, allowing oil to be released and ﬂow to the surface) and oil prices around US$100 per barrel are making it economic for these reserves to be tapped. Some even see the US becoming self sufﬁcient in oil again in the decades ahead.

US housing bottoming

A collapse in the US housing sector was at the core of the sub- prime mortgage crisis in the US which subsequently morphed into the global ﬁnancial crisis. US house prices and housing construction surged into the middle of the last decade as lax lending standards underpinned a huge surge in home ownership. Boom turned to bust, starting around 2006 as housing supply started to surge and it became harder for sub-prime borrowers to reﬁnance their loans. Foreclosures rose, made worse in turn by rising unemployment as the whole process fed on itself. The subsequent slump has seen a 34% plunge in house prices. This has seen the volume of private residential investment collapse by about 60% from its peak in the mid 1990s, resulting in a huge drag on US gross domestic product (GDP) growth.

Why the worst is likely over for US housing

There are good reasons to believe that the US housing market is bottoming and starting to recover.

The ﬁrst thing to note is that most US housing indicators have stabilised. Home sales have been bouncing along a bottom since 2009. Housing starts and permits to build new houses have been bottoming since late 2009. Furthermore, the National Association of Home Builder’s conditions index has now broken out on the upside, pointing to a rise in starts ahead.

Second, the number of vacant homes is now starting to fall sharply. Over time the equilibrium number of vacant homes has increased in line with the rising population. This is proxied by the long-term trend line in the next chart. It can be seen that the gap between the actual number of vacant homes and its long-term trend is now closing rapidly. Related to this, household formation is likely to rise sharply. Since 2006 it has been running well below that implied by population growth and has collapsed from a record 2 million to around 700,000 last year. This reﬂects tough economic conditions causing young people to stay at home with their parents for longer and is likely to rebound as economic conditions improve. If the number of vacant homes continues to decline at the same rate as the last couple of years and household formation picks up then the overhang of housing will likely be gone by year end.

Third, the stock of unsold new homes has largely vanished. It is now at its lowest level since the 1950s. This seems more extreme when it is compared with the fact that the US population has more than doubled since then.

Fourth, while the US mortgage foreclosure rate remains high, the delinquency rate is slowing as are the number of new foreclosures, pointing to a decline in foreclosures ahead.

Finally, housing affordability has reached a record level. While this has not been acted upon given the excess supply of housing and tough economic conditions, we are likely to see greater demand for houses as the excess supply dwindles and economic conditions improve.

Similarly, house price to income and house price to rent ratios have collapsed, pointing to good value in US housing.

The improvement in US house price valuation measures stands in stark contrast to the still very overvalued Australian housing market…but that’s a different story. Note both the US and Australian charts use OECD data for consistency.

The bottom line is that the US housing market appears to have bottomed with recovery in both activity and prices likely.

What a recovery in US housing would mean?

A recovery in US housing has several implications.

First, by reversing a signiﬁcant drag on the US economy it should help perpetuate economic recovery.

Second, this is likely to be reinforced by a boost to US household weatlh as house prices stailise and recover.

Third, residential construction is a key user of raw materials like copper, therefore a recovery in US housing construction should boost global commodity demand.

Concluding comments

While the secular bear market in US shares that began 12 years ago may have further to go, there are a number of positives suggesting there is light at the end of the tunnel. In particular the US housing sector appears to be bottoming. This is an important investment theme, but is difficult to play from Australia. Magellan and Platinum Asset Management have their portfolios positioned with this information in mind.

Taken from an article written by Dr Shane Oliver, Head of Investment Strategy and Chief Economist - AMP

Important note: While every care has been taken in the preparation of this document, AMP Capital Investors Limited (ABN 59 001 777 591) (AFSL 232497) makes no representation or warranty as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, ﬁnancial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, ﬁnancial situation and needs. This document is solely for the use of the party to whom it is provided.

We recently provided advice to a young couple Rob and Simone who were both around 40. They have two young children under the age of 10 and Rob has a daughter from a previous marriage who is now 20 and financially independent.

Rob was diagnosed with a terminal illness and given only a short time to live when he saw us and he wanted to ensure that his financial affairs were in the best condition they could be before his death. Rob’s will simply left all of his assets to Simone but upon exploring the family structure it became clear that Rob’s adult daughter may seek to contest Rob’s estate which could prove costly and stressful (other than to lawyers).

This situation reinforced the need to be clear on ownership of assets when estate planning and yet we are constantly amazed at those who seek to undertake estate planning without regard for ownership.

Their assets consist of:

Asset Owner Value

House Joint (Joint Tenants) $600,000

Car Simone $25,000

Superannuation Rob $650,000

(including insurance)

Shares Rob $30,000

Unused Leave Rob $50,000 (after tax)

The key issue at stake was to limit the value of assets paid to the estate that could be subject to a legal contest. We would add that prior to Rob’s ultimate death, his adult daughter openly discussed how she would like to use his superannuation monies to buy a house with her boyfriend, completely disregarding her father’s wishes.

Let’s examine what could potentially be paid into Rob’s estate and we begin by confirming that as their house is owned jointly as joint tenants, ownership will pass to Simone. The only assets that could pass to Rob’s estate could be his superannuation, unused leave and his shares.

In order to restrict the assets paid to the estate, we ensured that Rob completed a binding death benefit nomination to his superannuation fund that directs the trustees of the fund to pay the superannuation benefit to Simone. If this was not done, the decision about who to pay superannuation proceeds to, would be made by the trustee of the super fund. In the event of a dispute between Simone and the adult daughter, this could lead to the trustee taking the view that they simply pay the superannuation to the estate and remove the possibility of being caught in the middle of a dispute.

Rob’s shares were sold and the proceeds paid to Simone. The alternate course of action would have been to simply transfer ownership to Simone, but Rob wanted to sell the shares anyway.

This effectively meant that the only asset that was to be paid into Rob’s estate was his unused Leave entitlements.

Whether Rob was sufficiently insured is not for discussion in this article. We are focussed solely on ensuring that the ownership of assets was such that they were not to be paid into Rob’s estate and subject to a legal contest. With the exception of unused leave entitlements this has been done.

Effective Estate Planning is all about ensuring that your assets go to where you intend, in the most tax efficient manner and the most effective manner. When planning your estate it is critical that your adviser consider the ownership of your assets in addition to your family structure.

Note: Advice contained in this article is general in nature and does not consider your particular situation or needs. If information contained is not appropriate to you at this stage please pass on to family and friends who may benefit. Please do not act on this advice until its appropriateness has been determined by a qualified adviser.

It is believed that there is currently around $1.4 trillion in Australia in Cash and Bank Deposits in Australia as some investors have sought a safe haven. This is more than the total value of assets currently held in the entire Australian Superannuation System.

For those seeking income from their investments however, the below chart shows the after tax income from investing $100,000 in 1995 into a basket of Australian Shares (blue bars) compared to investing into a cash deposit that returns the RBA cash rate which is currently 4.25% (red bar).

The green bar is the level of income received when the value of franking credits from Australian shares is included. Franking credits from the tax already paid by a company before paying a dividend, which is effectively returned to the taxpayer through the tax system. Effectively this means that with the company tax rate at 30%, a 5% fully franked dividend equates to around 7.1% in pre-tax income when those franking credits are included. We have produced a video on our YouTube channel for those who wish to explore this aspect in more detail.

Click Image to enlarge

This chart clearly shows that for long term investors seeking income, that the after tax income from Australian Shares measured since 1995 is now providing around 3 times as much income compared to an investor who invested the same amount into a cash deposit.

Given that there are very juicy dividends on offer in the current investment environment such as Telstra paying 8.6% fully franked dividend (which is equal to more than 12% on a pre-tax basis), this is food for thought.

Note: Advice contained in this article is general in nature and does not consider your personal situation or needs. Please do not act on this advice until its appropriateness has been determined by a qualified adviser. While the taxation implications of this strategy have been considered, we are not, nor do we purport to be registered tax agents. We strongly recommend you seek detailed tax advice from an appropriately qualified tax agent before proceeding. The information provided is current as at March 2012.